Chapter 4 — Recording of Transactions — II

Chapter 4, Recording of Transactions — II, covers the special purpose books used to record business transactions efficiently: the cash book (single column, double column, and petty cash), the purchases journal, purchases return journal, sales journal, sales return journal, and the journal proper. It also explains posting entries to ledger accounts and balancing those accounts.

Special purpose books (also called subsidiary books or daybooks) are sub-divisions of the journal, each meant for recording transactions of a similar nature. When the number of transactions becomes large, a single journal becomes cumbersome; special books allow quick, efficient, and accurate recording and make division of labour possible in accounting work.

A cash book is a book in which all transactions relating to cash receipts and cash payments are recorded. It serves the purpose of both a journal and a ledger cash account; when a cash book is maintained, transactions of cash are not recorded in the journal and no separate cash or bank account is required in the ledger.

A single column cash book has only one amount column on each side and records only cash receipts and payments. A double column cash book has two amount columns on each side — one for cash and one for bank — so that bank transactions can be recorded directly in the cash book without opening a separate bank account in the ledger.

A contra entry arises when cash is deposited into the bank or when cash is withdrawn from the bank for office use, because both aspects of the transaction appear in the cash book itself. Such entries are marked 'C' in the L.F. column and are not posted to any ledger account.

Under the imprest system, a fixed sum called the imprest amount is given to the petty cashier at the beginning of a period. The petty cashier makes all small payments out of this amount, and when a substantial portion has been spent the head cashier reimburses the exact amount spent, so the petty cashier begins the next period with the full imprest amount again.

Only credit purchases of goods (merchandise) are recorded in the purchases journal. Cash purchases are recorded in the cash book, and credit purchases of non-merchandise items such as furniture or office equipment are recorded in the journal proper.

The source document for the purchases return journal is a debit note, prepared by the buyer when goods are returned to the supplier. While posting, individual supplier accounts are debited with the amount of returns and the purchases return account is credited with the periodical total.

The source document for the sales return journal is a credit note, prepared by the seller when goods are received back from a customer. A credit note is prepared by the seller; a debit note is prepared by the buyer — this is the key difference between the two documents.

The journal proper records transactions that do not fit any special journal: opening entries at the start of a new accounting year, adjustment entries for accruals and prepayments, rectification entries to correct errors, transfer or closing entries (such as transferring expense and revenue balances to trading and profit and loss account), and other entries such as dishonour of a cheque, credit purchase or sale of non-merchandise items, goods withdrawn by the owner for personal use, goods distributed as samples, and loss of goods by fire or theft.

Balancing an account means totalling both the debit and credit sides and writing the difference on the shorter side as 'balance c/d' so that both totals are equal. The balance is then brought down as 'balance b/d' at the start of the next period. Accounts of expenses, losses, and revenues are not balanced but are closed by transferring to the trading and profit and loss account.

The cash column of the cash book will always show a debit balance because cash payments can never exceed cash receipts and the opening cash balance. However, in the bank column of a double column cash book a credit balance is possible when cash withdrawn from the bank exceeds the amount deposited, which indicates a bank overdraft.

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